Sunday, May 30, 2010

Ray Dalio, Manager Of The World's Largest Hedge Fund, Totally Clueless On Inflation

It's hard to figure out what to make of this Barron's interview with Ray Dalio, CIO of Bridgewater Associates (subscription required):
Explain why the printing of money won't cause inflation.

The printing of money will offset the deflation that is coming from the weak demand for goods and services due to weak credit growth. For example, in March of 1933 the U.S. printed a whole lot of money, and that had the effect of converting deflation into modest inflation, but not a high rate of inflation.... My point is, in developed countries there is too much of most things at the moment, and that's creating a deflationary environment. There is too much manufacturing capacity. There is too much labor. There is too much housing stock. As Europe's economy weakens and its debt crisis worsens, the printing of money does not mean that it will produce an accelerating inflation because simultaneously there is also less being purchased, and the surpluses are already causing deflationary pressures. That is why, contrary to almost everybody's belief, I believe the bonds in countries that can print money will be good investments.
If you've been reading Economic Policy Journal at all recently, you are probably clenching your teeth as you read that last line. The only conclusion a person can come to when Dalio says that the bonds of countries that can print their own money, specifically, will be good investments, is that Dalio and his clients are about to be run over by an inflationary bus.


  1. The deflation trade will be the most crowded in history, with an equal and opposite unwinding. Even Dave Rosenberg recently came around recently to acknowledge the possibility of hyperinflation after reading a missive from an old ML colleague that managed a Latin American division in the 1980's. When people are afraid bread will cost twice as much tomorrow, they can't get rid of paper money quick enough. As always, inflation is not just about the quantity of money, but the expectation of its future purchasing power. The so-called cash hoarding looks deflationary for now, but allows individuals to be liquid and bid up commodities at the first sign of trouble. The Flash Crash was this playing out in the stock market, with everyone deciding it's better to be in cash simultaneously. There will come a day when everyone decides it's better to be in something safer than cash.

  2. As always, inflation is not just about the quantity of money, but the expectation of its future purchasing power.

    if the quantity of money is decreasing, why would expectations turn to inflation?

  3. BobE,

    Right. The whole interview was perplexing because Dalio seems to have himself positioned for both inflation and deflation, while his "theme" as given in the interview was that inflation really isn't a risk. He said he had purchased gold, for example. Then he says that the bonds of countries that can print (inflation) will be particularly good. Huh?

    The man is confused on other levels. He applauded the IMF/EU $1T bailout. He also said that we can't have a "double dip" or another "flash crash" because the central authorities "won't let it happen." Ignoring the fact that these crashes and economic recessions keep happening, he provides no explanation of where the central authorities get the infinite power to bailout in perpetuity with no cost-- yet he furthermore admits that more recessions will occur, and they will be spaced closer and closer together in time!

    Truly puzzling predictions and philosophy from this guy managing something like $75B!


    My assumption is that many have come to view bailouts and money-printing as the "inevitable" follow-up intervention to any bout of deflation. In other words, as soon as deflation leaves the economist's tongue, everyone is expecting inflation in response to it.